The Lending Club Experiment

Can you Really earn 10% Annual Returns These Days!?!

Find out at the MMM Lending Club Experiment Headquarters.

In September of 2012, I started making a series of investments in the relatively new field of peer-to-peer lending, choosing a company called Lending Club as the destination. The goal is to see if the higher returns really are attainable without luck or amazing analytical powers. It all started with these two articles:

This page will document my ongoing results, with results updated periodically (especially after significant economic events). Since you’re probably a “Show me the Money” type of person, let’s jump right to the results, then do a little analysis afterwards:

Date

Balance

Interest Received

Annualized Return

Late 16-30 Days

Late 31-120 Days

Default or Charged Off

Sept 24, 2012

$10,000

$0

~13% (projected rate after defaults)

0

0

0

Feb. 3, 2013

$21,060 (note: I added $10k plus received $300 referral bonus)

$579.53

20.12%

$48.46

$122.77

0

March 21, 2013

$21,516.29

$1,054.94

19.84%

$24.03

$308.90

0

May 13, 2013

$21,992.96

$1554.15

18.53%

$0

$214.00

$73.00

July 13, 2013

$32,549.52 (note: I manually added $10k of extra principal over the last month)

$2,174.54

18.30%

$114

$302

$121

October 8, 2013

$32,478.25 (note: I withdrew $1100 last month for another investment - transfer to bank worked well, about 2 business days)

$3,368.00

17.02%

$47

$518

$353

December 17, 2013

$32,959.53

$4,403.73

16.50%

$233

$613

$526

February 28, 2014

$33,568.54

$5,458.52

15.37%

$43

$802

$957

May 6, 2014

$34,131.67

$6478.23

14.48%

$121

$848

$1361

July 31, 2014

$34,837.59

$7866.18

13.52%

$141

$819

$2075

Sept 30, 2014

$35,400.36

$8,884.05

13.34%

$244

$809

$2523

Nov. 30, 2014

$35,968.71

$9898.79

12.97%

$82

$925

$3010

Jan 31, 2015

$36,322.07

$10,938.74

12.28%

$287

$850

$3704

April 30, 2015

$37,298.76

$12,513.94

12.22%

$108

$933

$4309

June 30, 2015

$37,895.42

$13,611.74

12.07%

$80

$1155

$4901

August 10, 2015

$38,255.98

$14,339.15

11.98%

$159

$1105

$5355

Sept 30, 2015

$38,845.55

$15,224.57

11.99%

$293

$1062

$5859

Nov. 7, 2015

$38,998.25

$15,992.22

11.63%

$246

$1211

$6214

Jan. 18, 2016

$39,593.51

$17,305.76

11.66%

$202

$1202

$7056

April 17, 2016

$40,546.48

$19,160.85

11.32%

$318

$1213

$8077

May 20, 2016

$40,927.88

$19,879.50

11.25%

$356

$1358

$8355

August 28, 2016

$41,962.57

$21,977.20

10.99%

$728

$2049

$9753

October 19, 2016

$41,601.03

$23,030.91

10.18%

$668

$2099

$10,991

January 2, 2017

$41,650.97

$24,665.74

9.56%

$499

$2205

$12,742

April 16, 2017

$41,574.38

$26,880.31

8.74%

$641

$2074

$15,061

October 24, 2017

$41,301

$29835

7.72%

$208

$1499

$18,323

June 29, 2018

$40,716

no longer shown

6.82%

$92

$527

$21,554

Key Update:

In October 2016, I saw my account balance drop for the first time. The balance went down $300, when statistically it should be up about $600 over that time period. With my balance diversified across over 2500 notes, this should be a highly unlikely event.

By the end of December 2016, I noticed the problem remained – 3 more months had passed, and the balance had barely changed. The default rate seems to have increased enough to eat up most of the incoming interest, which means this is no longer so much as an investment, as a way of redistributing interest payments from responsible borrowers to irresponsible ones.

Here in October 2017, the balance is still drifting downwards. It has now been over a year of flat or negative performance, a time period which should have brought in about $6000 of net interest according to original estimates. If this were a stock market investment, it would all be part of normal fluctuations. But interest bearing loans aren’t supposed to do this.

Therefore I have turned off automatic investments and will begin winding down this experiment – cashing out my money as the surviving loans are repaid. I have withdrawn $19000 in cash so far (although leaving it virtually in the table above to keep the month-to-month comparisons meaningful). This will tend to suppress the reported return rate, but the balance should still be rising if the loans were performing properly, which obviously they are not.

Older commentary:

Remember, the whole idea of Lending Club is making higher-risk loans in exchange for interest rates that are far higher than what you get in a guaranteed spot like a savings account. But along with high returns come some financially unstable borrowers, so it is inevitable that a certain percentage of loans will go bad. That’s all factored in to your expected rate of return.. but the million-dollar question is: Will the default rate end up being much higher than what Lending Club predicts?

I have seen many arguments on both side of this issue. In the early days, the more sophisticated ones (in my view) still seem to come down on the side of “projected returns are likely to be accurate”.

However, the company expanded aggressively to earn new borrowers over the years, and some of the marketing was targeted towards buying more shit rather than getting out of debt by refinancing old loans and halting your bad habit of buying shit. Also, I believe the flood of cheap investor capital led to lower interest rates and more lax standards.

In my opinion, this is a recipe for bad lending. Nobody should be borrowing money for consumption – buying a truck, boat, or a kitchen renovation.

The only things worth borrowing for are appreciating assets – a house in a reasonable market, and business and education in certain cases. Since Lending Club’s interest rates are not low enough to be used for mortgage or business lending, I had my account set to only fund debt consolidation loans.

But the good thing about this experiment, is that we get to find out for ourselves.

Here is my allocation across various note grades:

Most of my notes are the volatile but high return D and E grades – this is the key to the above average returns of this experiment.

Now about 4 years into the experiment, we’ve been seeing the expected stream of defaults and chargeoffs for quite a while. I’ve been looking into defaults individually to search for patterns. As a group, new loans seem to experience a wave of defaults, while people who have established a pattern of payment seem to continue paying. After about two years, the return seemed to have stabilized, but more recently they have started dropping again.

After accounting for all defaults so far, the annualized return of 10.18% is about 2% below the forecast.

The next test will be to see how this account survives a stock market crash and a recession (compared to the stock market as tracked in my Betterment experiment), whenever that happens next.

There is a very handy new Rate Adjuster feature on the LC dashboard: click it and it will automatically calculate a more conservative rate of return for you by writing off a portion of your late loans for you based on the percentage of those loans that on average are recovered, versus going bad. Clicking it with today’s results, I get 8.27% – a number which was stable above 10% for some time but has really started dropping in late 2016, so it might be the real answer for our long-term returns.

More conservatively, if you just look at more recent returns, my passively ignored account has grown from about $35,000 to $42,000 over the last two years – a compound annual growth rate of 9%.

After analyzing the early results, I noticed that my manual note selection was not particularly magical at increasing returns or decreasing defaults. So on January 30th, 2014, I switched the account over to their Automated Investing (formerly called ‘Prime’) service, which will handle reinvestments automatically for me. AI will obey your desired allocation across note grades, and you can now even combine it with one of your manual filters. This experiment has been going well, and the reduced amount of idle cash is providing higher returns and lower stress – no more manual fussing around with notes.

Since beginning this experiment, Lending Club itself has grown significantly in scale. This article in the Economist describes the flood of institutional money that is now pouring in to these notes, and the May 2013 Google Investment in Lending Club was a boost to its stability and credibility as well.

May 2016 Update: The company hit the news recently due to some improper handling of loans sold to a large investor. CEO Renaud Laplanche resigned over the issue and their stock price took a plunge. Some details in this NYT article. This has triggered an investigation by the US Department of Justice and SEC.

August 2016 Update: This Bloomberg article revealed some more questionable history in the company: back in 2009, the former CEO and other insiders took out some unneeded loans and rapidly repaid them to juice the company’s early results to impress investors. There were other allegations regarding individuals taking out multiple loans to cheat the risk ratings system, but I feel that this response by the new CEO Scott Sanborn addressed that properly, unless further information comes in.

So while the news certainly isn’t ideal, it sounds like the company is likely to recover in the long run. I’ve halted the reinvestments, but I don’t see a reason to cash out too hastily by selling the notes on the secondary market. If you’re not confident about investing yourself, you can just watch what happens to my investment instead, with no risk.

It will be interesting to see if my loan results keep going downward, or if they flatten out and recover again. Especially if the US economy happens to tip into a recession before they’re all paid off. Fun experiments with real money, in the name of curiosity and science :-)

* Note that Lending club actually does revive a fair portion of late accounts, see the second article above for more details

Thanks for sharing your numbers! I’ve been happily investing with LendingClub for just over a year — also using their Automated Investing so it is super easy. Now I’m ready to invest more, and thinking of diversifying by starting a Prosper.com account as well. Have you considered that too? Thanks for an awesome blog. Will be spreading the word.

George, have you considered any of the other automated investment tools? I recently diversified into Prosper and have been happy so far although it’s still very early.

PeteDecember 6, 2014, 11:15 am

Ryan,
Just stumbled across this page hence the late comment. How is your Prosper going? I invested in it (about 1000 per month for a year) way back in 2007, but the best I could do was break even. Perhaps it has gotten better to invest in now, but there were a LOT of loans that were written off…and these were supposedly the A+ quality ones (or whatever their ranking was).

It sounds like you started investing in the early days. There has been new management since you began investing and in my opinion they have turned Prosper around. Prosper nowadays is sometimes dubbed Prosper 2.0 after some of the issues in the early days. I’d say it is definitely worth another look. I felt very comfortable investing with them starting this year.

As for me, It’s still pretty early and I haven’t even been posting my returns since I don’t think it is an accurate representation. My average rate is around 18% and I haven’t seen anything as of yet that would raise concern. The best thing you can do is look at some of the past performance. I’ll have another update at the end of the year, but here was my experience after two months:

Also, I’ve taken all my money out of the stock market and plan to put it into peer-to-peer lending. It seems to me that the Stock Market is a giant Ponzi Scheme. Plus, my values don’t align with most of the top corporations whose mission in life is shareholder profit, not employee happiness or healthy communities. Actually it’s not just their mission, it’s their legal fiduciary responsibility. By contrast, peer-to-peer lending is about supporting the everyday person. Gratefully, as you’ve discovered, the returns are likely to be higher than Index Funds…

Wow! That is certainly a bold move and this is coming from someone who is a huge supporter of peer to peer lending. I would love to hear more about how this change is going for you – feel free to reach out via my site. I think the important thing to remember is that right now it is possible to achieve higher returns than the average stock market returns. But what happens in different financial times such as a financial downturn, rising interest rates, high unemployment etc? They actually warn you against putting more than 10% of your investments in it. There are still too many unknowns to make that big of an allocation to one company/asset class in my opinion. Peer to peer lending is definitely about helping other people out, but it is becoming less and less of ‘peer to peer’ every day with banks, hedge funds etc. getting involved. Best of luck!

timDecember 19, 2014, 9:41 pm

peer to peer lending about helping everyday person???? no it isn’t. its about making a profit on your money, which is perfectly o.k. dont pretend youre doing it out of the goodness of your heart if you were you wouldnt want any interest on your money and if youre willing to make interest free loans sign me up but dont hand me the im trying to help my fellow man line of bullshit

AaronJanuary 23, 2015, 12:24 pm

You know Tim, it is possible to help people out and still make money. There is a difference between exploiting people and making yourself a pauper. Your interest free loan is not as “helpful” as a loan with no principal payback, or a “pay what you can afford” type of loan. But an interest free loan would certainly help someone, as does a lower interest rate loan, which is what LC offers up. Unless you think someone having to pay only $200 a month instead of $225 isn’t helping them. Sure only having to pay $180 is helping more, not arguing that, but a smaller financial burden is still a help, and far more sustainable for the long term.

Tim St LouisJanuary 31, 2015, 10:12 am

Hi Aaron, tim (I’m a different Tim) is just saying:

Be honest with yourself and don’t pretend peer-lending is altruism.

There’s nothing wrong with making honest money, just don’t decorate the business model with pretension.

TimFebruary 11, 2015, 10:47 pm

Thank you at.louis tim. That’s exactly what I meant. Eloquence has always escaped me. Seems to me the world these days ridicules every form of ambition. Nothing wrong at all with trying to improve your lot in life and no one should have to defend it or pretend it’s something else.

Bob PickardMarch 7, 2015, 11:22 am

George – Came across this and was wondering how your investments were doing almost 5 months after making the change – From the chart above , I noticed defaults were increasing – I was wondering where the returns would be if the defaults were higher at the beginning of investments rather than at the end . Much like retiring at the beginning of a bear market , the possibility of you running out of money looms large – Thanx for any info you can provide – Bob

NearlydawnNovember 14, 2014, 7:28 am

Just started up my account! I like the idea very much, and your historical data helped me analyze whether this was a good fit for my personal portfolio. Thanks so much for taking the time to provide the data.

VivaciousNovember 16, 2014, 7:01 pm

Thanks for posting this! Can you clarify if the interest received (column 3) is either (a) interest or (b) interest and principal? Are Lending Club loans fully amortizing? Which classes of investments did you invest in (A-FG)?

Hi Viv, column 3 is just interest (so your net profit is interest minus all losses). The loans are all amortizing over 3 and 5-year periods, so there is constant rebuying going on automatically with the incoming payments. Loans are mostly in D through G.

VivaciousNovember 18, 2014, 10:36 am

Thanks for the reply MMM! What category of loans do you select in the filters (e.g. FICO score, income verification, etc)? Any best practices, learnings on what loans you don’t like? -Viv

It’s the go-to analytics site (free) for both Lending Club and Prosper.

JasonNovember 27, 2014, 10:36 am

I’m curious as to how you’re filtering today. Do you have an update on how you’re filtering for automated investing? I can’t imagine you’re deploying cash very quickly unless you’ve opened up some of your criteria? Have you moved to 60 month notes to get D through G interest rates? The filter you mentioned in previous articles is showing mostly A grade notes, occasionally B. D through G is basically non-existent.

Thanks!

YzTufoNovember 18, 2014, 5:43 am

Are there any p2p lending programs for non us citizens? I have an account in the US but no social security number (with a ridiculous .25 interest rate). I live in Colombia and I have yet to find a site like Prosper or Lending Club.

I’m not aware of any specifically in Columbia, but there are a couple of Bitcoin p2p lending companies that are open to investors/borrowers all over the world. I still think they are in there infancy and there are additional risks, but it could be an option. I wouldn’t compare them at this point to the likes of Prosper and Lending Club.

TrilbyNovember 18, 2014, 1:08 pm

I tried Lending Club in 2009 and was very disappointed. To me, the fly in the ointment was their toothless “collection” procedures. They send the borrower an email. the another one. then they say, Oh well! And charge it off. Ridiculous. I was happy to get out without about 2% more than I put in, after 2 years.

Joe AverageMarch 9, 2015, 12:34 pm

They now auto-deduct the payment from the customer’s bank account. That’s been the case for two or three years now.

benNovember 21, 2014, 10:21 pm

Is there any concern about the time horizons involved? I understand there is a secondary market for exiting loans before they mature; any experience to relate? I am intrigued by Lending Club but I want to make sure I could exit quickly if needed.

It’s true, you can’t simply cash out your entire p2p lending account as you would with a stock or a fund. However, there is a secondary market and with enough patience you will be able to sell your notes and I’m aware of others who are trying to solve this issue. For now, I’d like to offer another viewpoint from a reader of mine:

Lending Club notes are essentially short duration bond surrogates. The very shortness of their duration provides liquidity. If people need funds immediately there is FOLIO. (I know they may take a slight “hit” but in an emergency the liquidity is there).

Remember, you receive both P&I payments monthly.

Fred JonesNovember 22, 2014, 6:54 pm

Everything I’ve read about Lending Club sounds positive and I have just opened an account with small portion of my portfolio. Aside from prudence at investing in something new I have a big question that hasn’t been answered. These returns are high relative to a normal savings account. If, as suggested by you above, this has drawn institutional interest then, presumably, the supply of funds available to the Lending Club should increase tremendously. If that happens then the supply of lending funds available should, at some point, outstrip the demand for the loans. That should reduce returns down to normal levels. Why will this not be the case?

On the positive side, LC has been plowing advertising into publications where indebted people tend to hang out, and wrestling away billions of dollars of the business that would normally go to credit cards and other lenders. So their supply of available loans continues to rise along with the supply of investors: https://www.lendingclub.com/info/statistics.action

What they haven’t done is drop the interest rates too much. Since the rates are set by LC rather than a bidding process, they are able to keep these wherever they want, rather than letting supply and demand dictate them. The downside is if the rates are too high, they end up with excess demand and not enough supply of loans.

MKHMNovember 23, 2014, 10:38 am

With an annual household income of less than $50,000 and less than $250,000 in assets, Lending Club is off limits for us. Do you know of any similar opportunities for low-income investors? We do have about $100,000 in assets (not including home, car, etc) and no debt to speak of (other than about $95,000 left on our mortgage). So, although our income is not very high we have plenty to live day to day with some left to invest. For years now, we’ve just watched our saving account grow since neither me or my husband had any experience investing, but I finally decided it was time for a new strategy. I moved my retirement accounts to Vanguard ETF’s, bought a few dividend stocks, and was planning on moving the majority of the rest of our savings to Vanguard ETF’s until I learned about PTP lending. It sounded like a great place to put a few thousand dollars. I’m disappointed to learn that we are “too poor” to participate.

But! I will say that I was never asked for proof of income or net worth when I started investing in p2p lending. There might be a few options out there, but in my opinion none with the track record of Lending Club/Prosper.

MRBDecember 17, 2014, 10:23 am

I would say that Lending Club is NOT out of the question at your level. I make $60k a year with zero assets (no home, no car, no other stocks) when I started with Lending Club.

VivaciousNovember 25, 2014, 3:48 pm

Tl;dr: you’re actually getting a half or less of what they advertise on Lending Club.

Ok, after modeling out the monthly cash flows on a Lending Club loan, I’ve realized that Lending Club is kinda of a sham. First, for the sake of round numbers, let’s say you’re investing $100 at 10% over 36 months. You’d like to think you’re getting a 10% or $10 yield per year, given the rate, but you’d be wrong. You are getting more like $8 year 1, $5 year 2, and $2 year 3 because of amortization (explained below). Therefore, you’re getting back approximately $5 per year for three years. After taxes and 1% management fees and 5% defaults, you’re making $2 NET per year at most. Basically, you’re taking illiquidity risk and not getting paid much for it. For example, you could have purchased STWD stock (a real estate REIT), got paid a 8%, or 4x the amount, and have full liquidity.

So, why can LC advertise 10% but only pay you 5%? My second major point: amortization. Amo means your principal gets paid back with each payment. Each payment of principal means you have to REINVEST those dollars into other loans. So each year, when you’re getting “paid” back $10, half of it is interest, half of it is principal, on average. The 10% assumes you re-invested that principal you got back. IT is IMAGINARY unless you reinvest. The concept to realize is, amortizing loans AREN’T interest only loans, which pay you 10% interest per year and your FULL principal back at the very end. You can argue amo is better for risk, etc., and that is true, but on the flip side, amo is MUCH worse for your return. Amo works for banks because they originate loans for 30 years, etc.

Therefore, the payments you get from lending club loans constantly need to roll forward. So if you’re feeling like the economy is going to poop, and you want to get out, too bad, you’re stuck on what you’ve already put out because you rolled those loans forward 36 or 60 months.

In short, lending club is only a half as great as people think. And less than a quarter as great as people think net of taxes, fees, and defaults;) Actually, a 2% yield for all that risk and work is pretty horrible :( Hope that helps.

RobDecember 4, 2014, 11:17 pm

Yes but it also means you are getting the money back as well. It isn’t all locked up for the entire period. So when you only get that $2 at the end, that $2 may be be 2% of $100 but you no longer have $100 in that particular loan. Besides, most people will be reinvesting it for a while, but it is definitely something worth noting, it is a very different structure with different risks and rewards.

Also, the defaults are included in their numbers(5% is the total amount, not each bracket is the same so a loan at 10% would have a much lower default rate), that is why the loans with 20% borrower interest still have an expected return under 9% for investors.

Vivacious, I have to respectfully disagree with your analysis. Return percentages for all investments are calculated on the amount of money you currently have invested, not the amount they have handed back to you!

If you turn on LC’s “automated investing” feature, you keep 100% invested at all times, which keeps the return at 100% of promised value.

Also, while the interest rates for individual loans are indeed gross figures, the overall advertised rates on the LC website are NET of defaults and fees.

So in my table of returns above, I have so far earned just under 13% net (gross is closer to 20%) Factoring in the future defaults on the currently healthy notes, the forecast return is more like 11%.

An 11% yield for virtually zero work is pretty good. But I admit that the risk is yet to be determined, since I haven’t held this account through a serious recession yet.

A popular way to more accurately track p to p returns is the XIRR method, which you can do with an excel spreadsheet or you can do online here: http://www.lendingmemo.com/xirr-calculator/ It is true that the return isn’t as high as it would first appear. You deposit money. You wait four days. Then you can start to invest. Assuming you can find enough notes that meet your criteria that first day, you then wait. At least 1/3 of them aren’t going to issue, which may take a couple of days, or may take almost two weeks. Your money is tied up until then, earning nothing. Then you have to pick new notes to take the place of those which weren’t issued. A month after investing $5000 in LC and $5000 in Prosper, I have $400 pending for each of them (notes selected but not yet issued) and about $50 cash. Both accounts are set on automatic with some filters.

I’ve been investing in LC for five months now. I’ve bought a lot of notes on folio, many at a premium. I’ve had some pay off early. I’ve sold some that were late. While LC says my returns are 11% annualized, XIRR says about 5.5%. I expect that to climb as my money gets invested and stays invested (two months ago is when I broke even on my first $1550) but I don’t expect my real returns to equal what LC says they are, because of the cash drag.

DraglineMarch 2, 2015, 11:27 am

Well, you are being quite charitable about what V said. I’ve been investing there since 2009 and the returns, defined as (payments – losses)/(amount invested) have been pretty much in the 9-10% range and have been better as I learned not to waste time with A-rated debt.

timDecember 19, 2014, 9:54 pm

i dont know if your math is right. i opened my LC account in february so didnt receive any interest until march. i opened with $2500 and made a few 5,000-10,000 deposits between april and august making my total deposits $32000. i have gotten $2026 dollars in interest so far this year- that does not include repayment of principal and i have reinvested all payments. i use a different criteria for lending than MMM and so far (knock on wood) have zero defaults and a 10.29% return. my only turn off with LC is i think they shouuld provide more information on borrowers. for example- are they married/ single? do they have a single income household?, what city do they live in? (they recently began omitting this and wont respond to my emails regarding an explanation for this change), whats the borrowers age? etc etc. overall im pleased with LC as an investment. i think its a decent diversification tool but am probably more likely to withdraw funds than add funds to it.

AnneNovember 30, 2014, 5:40 pm

Hi – I am looking at investing with the Lending Club, and am curious about what “spread” or choice of loan grades you chose to optimize returns and not defaults. Obviously higher than just As; but how many Bs or Cs or beyond?

Anne, I can’t speak to MMMs choice of loan grades, but one of the great things about LendingClub and Prosper is the (relatively) openness as far as data goes. I suggest you check out NickelSteamroller and do your analysis on loan grades vs. defaults. You can likely get an idea of the ‘sweet spot’ for interest rate vs. defaults. Keep in mind this is historical data and it doesn’t guarantee future results, but it gives you an idea. Also be aware of/adjust the filters accordingly since 2014 returns will obviously be stated higher due to the notes not being seasoned. You can start here:

Yes, that’s an excellent place to analyze potential and actual returns.

My experience is that the sweet spot for loans is in the 12% + category. About half of my loans are in the Cs. About 30% are Bs, but I’ve stopped taking them on except for those over 11% with a 36 month term. But you need some decent filters — they will weed out most of the Ds and higher as bad risks. My weighted average rate is just over 14%.

TravisDecember 8, 2014, 9:02 pm

How does this interest income affect taxes? I don’t want 9% returns turning into an effective 5ish% return due to a higher tax bracket plus state income tax instead of Capital Gains only reducing it to an effective 7%. That could also hurt doubly on an early retiree Roth Conversion Ladder strategy. Thoughts?

For tax efficiency, if you don’t need current income you would want to hold your LC in an IRA. On the other hand, for early retirees in a low tax bracket seeking monthly cashflow, an LC account can be a useful component.

MikeDecember 9, 2014, 10:55 am

My experience with Prosper is that it takes a lot longer to fulfill a given automated order because they don’t have as much volume of loans going through relative to demand. I have a conservative automated selection (top 4 tiers and only physical assets or credit card debt) but it took multiple months to buy $12,500 worth of loans vs. one month for lending club.

Bob DerekDecember 10, 2014, 9:04 pm

Actually your chart is a little scary. You’ve gotten about $10,000 in interest less $3000 in write offs, so say you’ve gotten $7000 back so far, over a number of years, is that right? And of course there are fees. The gain has to be deflated somewhat. But you still have about $32,000 at risk, over four times what you’ve gotten back, so are the gains paper gains that could be wiped out by a meaningful default? That is for your annualized gains to hold up things would have to keep going the way they are. Not sure — Just askin.

Invesotrs SHOULD look at Adjusted NAR not just NAR (Net Annualized return) or AR (Annualized return). I mean you have to account for default. Real returns are Adjusted NAR and they are not in double digits as you can see from their own page.

This is still a good investment, but lets not hype returns. Getting a low volatile 7-8% consistent is nothing to sneeze at. For the record I have been investing in Lendingclub for the past 6 years and in that time my real adjusted XIRR based returns are 8.2% (net fees, net defaults, net recovered, in a well diversified portfolio).

Few other platforms in real estate crowdfunding (equity)/crowdlending (debt financing) can push the real adjusted returns to 9%+. Not going to post links, but if people are interested I can post them later (lest folks think I am marketing – I am not; thought this was a good post and good conversation in comments)

AndrewFebruary 10, 2015, 11:48 am

I’ve been using Lending Club for 2.5 years and my Adjusted NAR is 10.5% (non-adjusted NAR is 12.3%). I use a fairly tight filter for selecting notes to invest in and I occasionally dump notes on FolioFN.

Mr. Money Mustache – Thanks for all of your work covering LC and the potential risks and rewards. I myself have been an investor through LC for about a year, and have increased my investment from $1000 to $5000 in that time. I also just invest $1000 in LC stock the other day because I fundamentally agree with the business, its aims, and its potential value in the futute…. but I have two questions for you:
1) would you consider buying the stock and if not, why?
2) I am doing work with my father in law for his retirement next year at age 68….he has only about $750,000 and is good health but has obligations including a current mortgage of $275,000. He needs additional income after retirement and is sketchy on his part or full time job prospects. Additinally I believe a large portion of his investments is in an annuity or a series of them. My question is should he consider allocating like $100,000 into LC notes (diversified across all letters A-E at least) for some cash flow and reinvestment’?
3) one bonus question — how do you advise he treat the annuities? Get out of them and get into mutual funds?

WrightDecember 29, 2014, 2:06 pm

I have really enjoyed this bit on Lending Club and your returns. One person mentioned selling notes on the Secondary market, but I haven’t yet seen anything about buying notes on the secondary market, which is what I have been doing for the past eight months. I live in a state where investing in fresh notes on the Lending club platform isn’t permitted (yet). I have had pretty good returns so far investing in these notes (~10%), and my strategies have varied as time has passed. The benefit to this is investing in notes that already have a strong track record of repayment. I have only invested in notes that are at least a year old, if not older. Of course, I would invest in fresh notes on the platform if I could, but I haven’t been disappointed with my experience so far. I am sure there are plenty of people who aren’t able to utilize the Lending Club platform and its wonderful automated investing and great returns, but who may have access to the secondary market FolioFn, just like me. Lendingmemo and Lend Academy are absolute treasure troves full of strategies that I use.

LynJanuary 11, 2015, 8:18 pm

This is real! When I was looking at a safe withdrawal rate of 4% from a very volatile stock IRA, it was very scary and frankly not going to work for my survival. I’m not sure what returns you’re expecting realistically, but LC is a stable, consistent cash flow with a great rate of return.

On a 13 month $140,000 LC IRA account, I’ve automatically received a conservative $800 a month, and it has still grown to $147,000 in value today. My current adjusted returns, after all defaults and charges, is 10.82%. Given my returns were higher in the beginning, I calculate them to be actually about a per cent higher over the first year. Using a very simple filter suggested by MMM), I think I’ve reached a pretty level point in my default curve. My withdrawal rate is calculated for only a nine per cent return, so the account is growing and can withstand more defaults or a downturn.

An annuity pays between 5 and 6 percent and you literally give away your principal forever. Bonds are paying nothing and will not for the foreseeable future. This is a fantastic diversification of my retirement portfolio, a great cash flow, and can be for anyone. I plan to draw from it for the next 25 years as I do today, and a greater amount later for inflation built into my calculations. What more do you want!!!

Believe me if the economy takes a dive, every investment will also, but I’m betting on the bank and I am now the banker.

TimFebruary 16, 2015, 8:58 pm

I’m in the minority I’m sure but I like annuities. They come in very wide variety many of which are guaranteed and insured. Ultimately all investing is an individual thing and what one person is comfortable with another may not be. For example I have 35k in LC and in a years time I have a 10.22% return but I’m not totally thrilled with it. I think they could provide more information on the borrowers mainly and plan to withdraw about a third of my funds. Many here get income from rental properties, I dont think being a landlord is for me. I don’t want to track people down every month for money, owning a house also costs money between taxes and maintenance it’s not for me yet others seem to do great with it. For stock allocations I only have a third of my money indexed. I buy individual stocks and I also day trade. I find it a relatively easy way to make extra cash but it’s not right for many people.. So congrats on your LC success but I would recommend perhaps delving a little deeper into annuities before writing them off completely. You may find one that fits you

LynFebruary 17, 2015, 7:39 am

I’ve read books on annuities and have had more than one financial “adviser” try to sell me on them. I have a friend who got a free steak dinner and was convinced to invest all of his money into a variable annuity. A few years later at another steak dinner an adviser convinced him to invest in a fixed. Just recently he is back in a variable. For the most part they are complicated instruments of profit for the salesman.

I’ve read that a fixed, with a good reputable company, can provide a reliable investment for someone who has no pension, retirement, or social security, but this article below, most honestly explains how I feel about annuities. You are giving your money to someone at a great cost, to have them give it back over time with very little return.

Most people do not understand that you give away your principle and never get that back. If you buy a $100,000 annuity it cost you $100,000, it’s gone, just to receive 5-6% of that amount back each year for your life span, which if 20 years or so, would be just like giving it back only over 20 years with no return.

This is not clearly disclosed in the sales speal!!!

You and I can do better most of the time.

The False Promises of Annuities and Annuity CalculatorsComment Now Follow Comments
> > Ever-popular annuities sometimes sound too good to be true, which in itself is probably a good reason to avoid them.An annuity is a financial product sold as a way to collect and grow funds and then later receive those funds as a steady cash flow during retirement. Annuities have many flavors and features that vary this basic principle, but the basic terms you will hear are “deferred or immediate” and “fixed or variable.”A deferred annuity puts off taking withdrawals, whereas with an immediate annuity you can take withdrawals right away. A fixed annuity has a preset withdrawal amount that does not adjust for inflation. A variable annuity is tied to the performance of some investment choices.Commission-based advisors with insurance licenses sell you whatever form of annuity would have performed well over the past decade. They say they are fee-based, at least partly to sound more like fee-only financial planners. If you are confused by these distinctions, then 93% of the financial services world who can’t call themselves fee-only are doing their jobs well. You do well when you remember that fee-based is not the same as fee-only.Let’s review the math behind an immediate fixed annuity. This type of annuity receives a fair amount of seemingly scholarly press trying to justify including this product as part of a balanced portfolio.Imagine that Thomas and Martha Jefferson, ages 64 and 62, respectively, purchase an immediate annuity that will pay them a guaranteed 6% annual return. If they have $500,000, they would receive $30,000 every year for the rest of their lives. This income, added to their Social Security, would comprise the spending for their lifestyle.This scenario sounds fair. After all, who wouldn’t want to have earned 6% over the last 10 years during these mixed markets? Earning 6% guaranteed feels like a good exchange for the uncertainty of the markets. But it is not. Here’s why.First, the S&P 500′s return over the past 10 years was 6.34%. So even in some of the worst markets in recent history, the return of the S&P 500 was better than the perceived return of this guaranteed annuity.Second, the annuity does not have a 6% return, even if the Jeffersons lived forever. Buying an annuity begins with the immediate loss of 100% of your original investment. So for the first 15 years, the annuity company is simply giving you back your original purchase price. The way most salespeople describe thinking about the annuity discourages investors from realizing that their original money is gone forever. They do this by referring to it as an investment. I would not call it an investment because after you purchase an annuity, your principal no longer has any value.The entire selling point of the annuity is a lower return in exchange for a guarantee. But when analyzed, the purchase price is a loss you can never recover from. We can analyze this annuity purchase like an investment and calculate an internal rate of return (IRR). For the first 15 years, the IRR is 0% because the annuity company simply hands you back your own money.If Thomas and Martha die after 16 years, the IRR would be 0.92%. If they live to age 85, after 23 years the IRR will finally have risen to 3.47%. If they both live to be 100, the IRR would still only be 5.57%. Even if the Jeffersons lived forever, the IRR couldn’t exceed 6% because they lost their original $500,000.
> >
> > Third, immediate annuities are not indexed for inflation. Part of their appeal is having at least some stream of guaranteed spendable income, but guaranteed to buy what? This annuity quote is for a fixed payment of $30,000. The payment is fixed in dollars whose buying power diminishes by inflation every year.According to the government consumer price index (CPI), $5,081 in 1970 had the same buying power as $30,000 today. Imagine thinking you had your future retirement needs guaranteed in 1970 by buying an immediate annuity paying $5,081. An annuity is supposed to be longevity insurance. But now at 104 years old, you are trying to live off a sixth of what you needed when you began your retirement.The only real guarantee of an annuity is a diminishing lifestyle because of inflation. We use 4.5% as an average inflation rate. By the time Martha is 85 years old, inflation will have reduced the buying power of the annuity from $30,000 to less than $11,000.Annuities offer too much income to spend early in retirement only to keep that number constant and offer too little later in life. This math error is part of their mistaken appeal to the public. We would suggest that the safe spending rate for a couple with $500,000 is only 4.17% at age 62. This would limit their annual safe spending to $20,850.But with an appropriate asset allocation and this rate of spending, the Jeffersons would have a good chance most years to enjoy an increase in their spending allowance greater than inflation as their assets appreciated. And any unused assets could be left as an inheritance for their heirs.Finally, I’ve used the example of a 6% or $30,000 annuity, but the best quote I was given for my sample couple was $27,569. And the quote for an annuity tied to the urban consumer version of the CPI index was for $15,814.We don’t recommend an allocation to annuities for any portion of your portfolio. We believe an age-appropriate allocation to bonds provides a similar boost to the likelihood you will have sufficient assets in retirement. We suggest allocating five to seven years of safe spending in stable investments with the remainder in appreciating assets.Coupled with staying within an age-appropriate safe spending rate, this strategy provides the best balance between sleeping well tonight and eating well in 10 years.

frufrauFebruary 25, 2015, 5:26 pm

I am a recent experimenter with LC, and I’ve just heard something disturbing. It appears that LC is targeting its existing borrowers for refinancing. While I can see this being positive for the borrower and for LC, which collects fees from this ‘churning’, it’s certainly not positive for the lending base, most especially those of us who can’t buy notes directly and wind up paying markups for them. The very agency that is encouraging me to lend money is turning around and effectively cancelling my investment after I’ve paid for it so it can collect more fees? Really? I feel it’s a serious conflict of interest for LC to be encouraging early payoffs that take interest out of the pockets of the client lending base they depend on to fund the loans in the first place.

I agree that there is a conflict of interest – LC benefits from refinancings, as do the borrowers. And the lenders pay in the form of lower returns due to higher churn costs. On the other hand, I do think people should get the lowest interest rates that investors are willing to give them, and borrowers would already be free to refinance themselves independently. Maybe the author’s request for disclosure is the right solution.

MikeFebruary 26, 2015, 9:26 am

A net loss month-to-month from Dec. to Jan. – concerned?

DraglineMarch 2, 2015, 11:56 am

Have you looked at the “Understanding Your Returns” link (on the LC portfolio summary page) and graphics regarding your portfolio? It can tell you where you rate as compared with other investors with similar portfolios.

It might be something you would want to snip and post above.

AndrewMarch 8, 2015, 11:11 am

With these large returns over the past few years from LC, why not make them a larger part of your portfolio? Do you see the risk as being too high?

JasonMarch 19, 2015, 9:09 am

I have been interested in Len for a while now, but living they are not authorized my state (Texas). Any ideas on a workaround?

Harsh RealityMarch 24, 2015, 12:26 pm

Dear Mr. Money Mustache,

Over a one year period from February 28th, 2014 to February 28th, 2015 your Lending Club (LC) account grew by $3022.78. The balance at the beginning of the year was $33568.54 and one year later it was $36,591.32. I would be interested in seeing a justification for the posted annualized of 12.21% as of February 28th. Even the more conservative number of 10.61% appears to be overstated. To put all this in perspective the S&P 500 with dividends reinvested returned 13% for this same period.

It would appear the answer to your question “Can you Really earn 13% Annual Returns These Days!?!” is a resounding NO!?! Unless you invested in a low cost index fund during this period of time.

I understand the need to have catchy titles to attract viewers and add revenue/referral bonuses. I am not directly blaming MMM for this overly optimistic view. However, it seems that a former engineer such as yourself should be able to see through some of the mathematical fudge factors used by LC and other financial institutions. In fact, I would go so far as to say that blogs intended to be edumacational should be based on facts lest we all end up drinking the Kool-Aid. I will not go into any sort of experimental design at this point. This “experiment” lacks positive and negative controls, etc.

Full disclosure: I am a satisfied LC investor with a current self-calculated annual return of ~9%. This is right around what can be expected from an investment vehicle with moderate to higher risk. This also happens to be approximately MMM’s annual return when actually numbers are used instead of overly optimistic fudge factors. As a note my current LC fudge factor numbers are 15.28% and a 11.47%.

One great aspect of LC is that it does provide the investor with a decent stream of cash, much like stock dividends or bonds. This stream of income can help with early retirement as longs as expected returns are calculated in a logical manner.

RaymondApril 16, 2015, 8:16 pm

I think MMM is using Net Annualized Return which is normally greater than real return. LendingClub provided new measures not long ago. Among them, the Combined-Return | Adjusted Net Annualized Return is mostly accurate. In my case, my Primary Notes | Net Annualized Return is 13.04%, while the Combined Return | Adjusted Net Annualized Return is 10.48% (it’s very close to my XIRR rate over the past 12 months)

MattMay 1, 2015, 9:09 am

It may say in there somewhere, but how many hours in time do you invest in the Lending Club Experiment?

Good question Matt – before their Automated Investing service opened, I had to spend a good 10 minutes a week mindlessly checking boxes to reinvest cash. Now things are better – I spend no time on the account itself.

However, since I want to keep this page up to date I spend 10 minutes/month on that, and an extra 15 minutes annually to account for entering the data into my tax return.

AM43May 1, 2015, 9:24 am

I’ve been investing with LC since 2009 and my returns are right around 9.5% or 8.5% adjusted.
Also I’ve noticed that MMM has over 10% default rate which is terrible in my book on top of almost 1K of notes that are 31-120 late which some of them most certainly will go into default.
All and all I am happy with LC and I think its a great tool to earn returns above average.
I will take 8.5% net return any day.

Glad you’re happy with your notes, AM43. I think we just have different allocation strategies: mine are the high-risk stuff from C-G, which means much higher top-line rates and somewhat higher defaults. So I’ll always see a higher default queue on an account like mine, and this has been going on for years for me – loads of defaults.

But in theory it yields a higher profit as well. Our two accounts confirm this so far. The real test will be if my defaults go through the roof in the next recession, in sufficient quantity to wipe out the excess returns I’ve earned so far.

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